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    Proforma Income Statements

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    1. Colonial Furniture's net profits before taxes for 2005 totaled $354,000. The company's total retained earnings were $338,000 for 2004 year end and $389,000 for 2005 year end. Colonial is subject to a 26 percent tax rate. How large was the cash dividend declared by Colonial Furniture in 2005?

    2. In an effort to analyze Clockwork Company finances, Jim realized that he was missing the company's net profits after taxes for the current year. Find the company's net profits after taxes using the following information.
    Return on total assets : 2%
    Total Asset Turnover : 0.5
    Cost of Goods Sold : $105,000
    Gross Profit Margin : 0.30

    3. Use the percent of sales method to prepare a pro forma income statement for the year ended December 31, 2004, for Hennesaw Lumber, Inc.
    Hennesaw Lumber, Inc. estimates that its sales in 2004 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2004. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2003 is shown below.

    Prepare the pro forma income statement

    Income Statement
    Hennesaw Lumber, Inc.
    For the Year Ended December 31, 2003

    Sales Revenue $4,200,000
    Less: Cost of goods sold 3,570,000
    Gross profits $ 630,000
    Less: Operating expenses 210,000
    Operating profits $ 420,000
    Less: Interest expense 105,000
    Net profits before taxes $ 315,000
    Less: Taxes (40%) 126,000
    Net profits after taxes $ 189,000
    Less: Cash dividends 120,000
    To: Retained earnings $ 69,000

    4. If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would
    (a) decrease by $500,000.
    (b) increase by $1,500,000.
    (c) increase by $2,000,000.
    (d) experience no change.

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